February 12, 2019
A classic family business progresses through various phases from its start-up to maturity. It is quite common for the family business to metamorphose from a certain form of business to another across these phases. In most scenarios, the Founder typically starts the family business as a small enterprise or a sole proprietorship, which then continues to evolve through several business forms as it grows and expands into a conglomerate with a robust governance system and a well-defined multi-generational wealth transfer structure.
Most of the successful family businesses all over the world started as small enterprises with the Founder’s goals and vision as a major driving force in the conduct of the business. The early stages of the business see the Founder taking up most of the major operational roles in the business. This leads to accountability, tax and other operational issues which small enterprises usually encounter in the course of running the business. As the family and the business grows, a small enterprise may no longer be an ideal business form to accommodate the vision of the Founder in terms of wealth succession, capital sourcing, liability exposures etc.
This article addresses the various phases of family business transitions, the features of each phase and the role of family business governance across these phases.
Decisions on transition or conversion of Family businesses from a particular form of business into another are made based on the development stage of the business, the financial needs of the business and several other factors. Family businesses have been known to transit through business forms such as sole proprietorship/small enterprise, private limited company, public limited company (with the family owning the majority shares) and conglomerate. The structures to adopt for family business governance differs for each form of business. Hence where structures have been put in place at the initial stages, modifications would have to be made at each level of change to enable a fit of the governance practice with the form of family business.